Market Information and Signaling in Central Bank Operations, Or, How Often Should a Central Bank Intervene? (Electronic book text)

In almost all industrialized countries, the central bank implements policy by setting a proximate operational target for short-term money market interest rates and then using open market operations and other instruments such as standing facilities to keep rates near the target. An increasing number of developing and transition economies have developed similar operating procedures in recent years. Viewed more closely, however, practices vary widely. In particular, central banks differ significantly in the frequency with which they intervene in financial markets and the precision with which they steer market rates. The U.S. Federal Reserve and the Bank of England typically deal at least once a day with commercial banks in order to absorb or inject liquidity. In this way these central banks largely determine certain short-term interest rates, with the Bank of England normally allowing rather greater fluctuations in very short term money market rates. In contrast, the Deutsche Bundesbank usually intervenes only through weekly repurchase tenders, resorting to ad hoc "Schnelltender" just a few times a year. Between tenders, the Bundesbank is prepared to see at least moderate day-to-day fluctuations in market rates around its central operational target, even though it is technically capable of eliminating them.